Labour has piled further pressure on Rishi Sunak to take action to help struggling mortgage holders as the Bank of England prepares to raise interest rates again to levels not seen since before the 2008 financial crash.
Rachel Reeves, the shadow chancellor, said on Wednesday that if Labour were currently in power, it would force banks to offer a range of support to borrowers, including letting them move on to interest-only mortgages and extending their repayment period.
The intervention comes as the Bank of England is expected to raise rates again on Thursday, possibly by as much as 0.5 percentage points – a move that would lead to millions of households losing major chunks of their income in the coming months.
Reeves said: “Across Britain, people are being hit hard by a Tory mortgage penalty. Unlike this government, Labour will not stand by as millions face a mortgage catastrophe made in Downing Street.”
Labour’s announcement does not amount to a promise to enact such changes if the party is elected at the next election. But it does amplify growing calls for the prime minister to take similar action, before a meeting between the chancellor, Jeremy Hunt, and major banks on Friday.
Concern is growing among economists and members of the Conservative party about the fallout from the “mortgage timebomb”.
Figures released on Wednesday showed inflation stuck at 8.7%, as economists warned that rising wages could mean it takes longer to drop to pre-pandemic levels. Stubbornly high inflation has in turn caused banks to ramp up their mortgage interest rates above 6% for the first time since Liz Truss’ botched mini-budget last year.
Conservative MPs are beginning to worry about the possible electoral fallout as borrowers roll off existing deals on to much more expensive ones. A half-a-percentage-point rise would take the Bank’s base rate to 5%, a level last seen in April 2008.
A report by the Institute for Fiscal Studies on Wednesday said 1.4 million UK mortgage holders would lose a fifth of their disposable income as they rolled off their fixed-rate plans. Labour says the average mortgage holder is having to pay £2,900 a year extra thanks to higher interest rates since the mini-budget, while the IFS said the costs would be disproportionately borne by younger borrowers.
Conservative MPs have begun to worry whether high mortgage costs could cost them their seats at the next election, which is expected to take place next year, and are now urging ministers to intervene.
Jake Berry, chair of the Northern Research Group of “red wall” Conservative MPs, called on Tuesday for the government to bring back tax relief on mortgage interest payments – a scheme scrapped by the former Labour chancellor Gordon Brown in 2000. His call was echoed by Jonathan Gullis, the MP for Stoke-on-Trent North, who told the Commons: “Mortgage payers … are rightly worried at this moment in time, with the impending rebrokering that they are facing.”
Hunt will meet major mortgage lenders on Friday in an attempt to encourage them to do all they can to help mortgage holders. A Downing Street spokesperson said on Wednesday that the chancellor wanted banks to offer “the best possible products for their consumers”, but ministers have so far ruled out taking any stronger action.
Sunak said during prime minister’s questions on Wednesday that the best way to cut costs for homeowners would be to reduce inflation; he has promised to cut it in half by the end of the year. Officials say that if they intervene to help mortgage holders, it would dampen the effect of the Bank of England raising interest rates in an effort to curtail consumer spending.
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Speaking at a PM Connect event with voters on Thursday, Sunak will stress that he views cutting inflation as his first priority. “Beating inflation has to be the priority, because if we don’t get a grip on inflation now, the damage will be worse and longer-lasting,” the prime minister will say.
Karen Ward, a member of Hunt’s economic advisory council, said on Wednesday that the Bank of England would have to “create a recession” to bring down inflation.
Ed Davey, the Liberal Democrat leader, has called for the government to introduce a £3bn mortgage protection fund. Labour is calling for a series of interventions that would not require any additional money.
Reeves said on Wednesday that if she were chancellor, she would require financial regulators to force banks to help mortgage holders.
Under Labour’s plans, banks would be required to allow lenders to switch to interest-only repayments, extend their mortgage repayment period, reverse these measures at any point, and would have to wait at least six months before seeking to repossess a property, and make sure none of this had an impact on borrowers’ credit ratings.
The FCA says it has already given guidance to banks to encourage them to offer support along those lines if they felt it was in a borrower’s best interests. But regulators say forcing banks to offer such support could impede their ability to decide what is in the best interests of each individual borrower.
Tim Pitt, a former Conservative Treasury adviser, said he did not expect ministers to bow to pressure and copy Labour’s approach. “The FCA guidance is already there,” he said. “You could toughen some of that, but in reality they have limited ability to do much more than they already have.”